“In 2020, more than 400 activist campaigns were launched against public companies traded on the US stock exchange”, according to IR Update. Shareholder activism is becoming more prevalent in the US and conditions in Mexico are potentially ripening for activism here. In this week’s blog we’ll discuss why IR teams, and in particular IROs, play a key role in discouraging activism.
Activism in Mexico
One of the first major cases of shareholder activism in Mexico was in 1993, when U.S. institutional investors, led by the State of Wisconsin Investment Board, objected to a secondary stock offering at Tubos de Acero de Mexico (TAMSA) that would have let an Argentine steel baron, Robert Rocca take control of the company. TAMSA had come to an agreement with Rocca to sell controlling interest for $75 million in cash, at $5.65 a share (close to market value, but half of the book value). The Wisconsin fund owned about 9% of TAMSA, and argued the price was too cheap. The Wisconsin group carried out a media campaign to influence other US shareholders and also did news releases in Spanish to Mexican shareholders, encouraging them to buy the new stock and shut out Rocca. The attempt by the Wisconsin group was ultimately unsuccessful.
More recently in 2015 GAP, the airport group, successfully blocked Grupo Mexico from holding on to more than 10% stake in the company, on the grounds Grupo Mexico did not have board approval for the initial purchase. The case went all the way to the Supreme Court, where GAP prevailed, with poison pills effectively validated by the Supreme Court ruling.
Currently there is a takeover happening in the Mexican real estate industry that until last week was hotly contested. Fibra Plus is trying to acquire Fibra HD, who had implemented a poison pill. (For more information on poison pills in Mexico, see Miranda Partner’s piece Hostile Acquisition & Poison Pills). The latest news is that Fibra Plus has come to an agreement with Fibra HD to modify the agreed upon premium to acquire 100% of the CBFIs. They have agreed on 2.50 CBFIs of Fibra HD per share of Fibra PLUS. The Founders’ Trust (Fideicomiso Fundadores) agreed to give up half of the poison pill. They are hoping to sign by October 5th.
Stronger minority shareholder rights
One of the main factors that makes activism less likely in Mexico is the prevalence of families holding large or controlling stakes in companies. However, these days, family control is diminishing and Mexico has strong minority shareholder rights, potentially opening a window for more activist investors, notwithstanding the difficulty of breaking a poison pill. Also board members have fiduciary obligations to maximize shareholder value and would be reluctant to turn down an offer that clearly benefited shareholders, and then be subject to lawsuits. See below a few examples of Mexico’s shareholder rights for public companies, from a 2019 New York State Bar Association Paper:
- “Shareholders with voting rights that individually or jointly represent 10% of the capital stock can appoint a member of the board of directors and/or an examiner”.
- “Shareholders with voting rights that individually or jointly represent 10% of the capital stock can request the examiner or president of the board of directors, at any time, to call a shareholders’ meeting regarding issues related to their voting rights and can request the postponement of a resolution on a meeting’s issue with respect to which they feel uninformed.”
- “Shareholders with voting rights that individually or jointly represent 20% of the capital stock can object to a resolution related to their voting rights taken in a general meeting.”
Companies that have greater shareholder engagement and IROs with a long tenure are less susceptible to activism, according to a 2021 SSRN study.
Engagement works because activists rarely get enough shares to directly take over a firm, so they need support from other shareholders. If the IR department is doing a good job of keeping up investor’s perception of management, activists will perceive a more difficult path and get discouraged. An IR team can also resolve shareholder concerns before they escalate. If your firm has a reputation of having good relationships with your shareholders, this will also discourage activists.
Firms with more institutional investors have the opportunity for more success with IR engagement, in terms of preventing activism, because there is a smaller and more influential group of shareholders that they can build influential personal relationships with.
The SSRN study found that IR-engaged firms (especially with long tenure IROs) are:
- Significantly less likely to receive a tender offer.
- Investors that acquire more than a 5% share are less likely to have the intent to exert influence over the company.
- There is a lower likelihood of CEO turnover in the year after initiation of an activist campaign.
- When investors use a shareholder proposal, firms with strong IR have a higher likelihood of the proposals being withdrawn before a vote.
How Miranda IR can help
Miranda IR are experts in corporate communications and can help you create a shareholder engagement strategy, along with any other IR needs.
Contacts at Miranda Partners